Don’t Hide Your Dollars - 24 February, 2003

Can the government once again organize a tremendous devaluation of the ruble?

A tendency for ruble strengthening that has recently outlined in the country seems to be a serious alarm for financial analysts. And there is no wonder that it is so. First of all, a strong ruble will reduce the competitive strength of Russian exporters. This is actually very serious, as Russia’s export of raw stuffs is a condition of successful budget performance and a guarantee of another exact foreign debt payment. No matter what analysts may say, “easy” petrodollars are a considerable dope for a worn engine of the Russian economy. But as nobody is interested in a strong ruble, there will be no strong ruble at all. What may happen then? Is it possible that the 1998 devaluation may repeat once again?

Strengthening or relaxation of the ruble is directly connected with activity of the RF Central Bank on the currency market. But after resignation of the Central Bank Chairman Viktor Gerashchenko, the bank is just an obedient financial instrument of the government without any independent importance. That is why when the Central Bank leadership declared it was undesirable to retain the ruble rate at the expense of currency buying-up, the dollar rate immediately started dropping, which in its turn made the Russian population rather nervous.

We have already witnessed two rather considerable bounces of the dollar rate. For the time being, it is not clear yet what consequences may still follow. The people are already nervous about the fate of dollars they have earned. Who needs Russians to be so much nervous?

Analysts say that in a long-term outlook no radical changes are to happen on the currency market. As it has been mentioned already, excessive ruble strengthening is unprofitable neither for domestic commodity producers, nor for the Bank of Russia itself. Strengthening of the nominal ruble rate, or revaluation, that we are currently witnessing, is not a big surprise for professionals of the currency market. However, forecasts concerning further development of the situation are rather contradictory.

As financial analysts think, the dollar rate will fluctuate up and down within it’s present-day level within the limits of a month or several weeks. Experts say, the situation may seriously change when either inflow of currency proceeds will change, or when the currency regulation norms will be changed. The Central Bank can also (after an instruction from the Kremlin) recommence the policy of more active intervention into the currency rate formation. It depends upon oil prices whether this period will be long or not. However, from the point of view of a long-term outlook, many people share the opinion that ruble devaluation must be recommenced. At that, this can be done in a sudden bounce that will immediately depreciate the ruble. Otherwise, under conditions of the world-wide recession Russia’s economy will experience hard times.

We would like to mention that about half a year before October 1998 many of the Russian businessmen, economists and deputies started attacking then-government and leadership of the Central Bank with appeals to start a smooth ruble devaluation. Supporters of devaluation predicted a forthcoming crisis and hoped to alleviate its consequences. At present, there is no need to dwell on the reasons that made the government of the country reject that variant of the situation development. When the Central Bank couldn’t any longer peg the ruble rate and devaluation occurred by itself, it turned out that no stabilizing financing from the IMF could save Russia’s economy from collapse. However, the number of supporters of constant “floating” devaluation has seriously increased.

At present, the situation is also influenced by a factor that is far from economy, by forthcoming parliamentary and presidential elections. And Russian politicians immediately decided to speak about needs of the people. They state that because of the advance inflation rate the life of ordinary people is not that careless as politicians promised a couple of years ago. If so, the Russian authorities declared a war against inflation, even despite objections of politicians. This fact was stated by Russian Minister of Finance Alexey Kudrin and Prime Minister Mikhail Kasyanov at a recent session of the government.

The struggle against inflation for political reasons will finally deliver a strong blow against the national economy. This is because the whole of Russia’s financial system rests not upon increasing of domestic investments, but upon inflow of dollars for export of Russian raw stuff. Decline of export may in its turn result in reduction of financing meant for elections, that may further entail recommendation of an alternative candidate to the presidential post instead of Vladimir Putin. This possibility is already being spoken about in the government.

What can ordinary Russians do in this situation if they wish to preserve their savings? Many experts and large-scale businessmen often say now that the ruble is strengthening and it’s currently very profitable to keep savings in Russian rubles. However, the situation is not like this at all. Especially taking into consideration the fact that Russian bankers are actively lobbying restrictions to be imposed upon preschedule bank deposit taking.

Actual purposes of the Russian authorities are obviously far from mere care about the welfare of the population. No doubt that our common interests will be once again sacrificed to more “important” interests of the ruling class.

So, a recommendation for Russians is not to make haste and convert dollars into euro. Converting of one currency into another is very unprofitable under the present-day conditions in this country, even if you wish to convert just small sums of money. You’d better find a job to be paid in euro. Don’t make haste to deposit your savings into Russian banks, as it may become a problem in the future to get this money back. If you have savings in dollars, let them remain in dollars. Remember that nobody needs a strong ruble, that is why the Russian ruble won’t be strong.

And what is more, a probable war in Iraq is a nice opportunity to do something with the ruble. To depreciate it several times, for example. And don’t be confused with the forthcoming elections. Why are you so much sure that Vladimir Putin will be obligatorily on the presidential post for a second term? There is also a suggestion that Prime Minister Kasyanov may also take this post to become some kind of an alternative to the so-called “Yeltsin’s Family”. A small-scale economic crisis together with a partial default is a suitable instrument for cleansing and renewal of the ruling elite, and for reviving of the national economy.